Rules For Rookie CEOs

What do new CEOs Jonathan Schwartz of Sun Microsystems and Ephren Taylor of City Capital have in common? Any newly appointed CEO or general manager faces two immediate challenges the first day on the job.

The first is diagnosing the state of the business he or she is taking over, paying particular attention to where the critical problems and performance issues lie.

The second is assessing the people who have been running things up to that point. It isn't simply a matter of separating high performers from underachievers, although that is obviously important. It's primarily a matter of testing the knowledge and capabilities of the organization as a whole so that the new CEO can draw on its strengths and fix its weaknesses.

Those are two difficult chores, but some CEOs have developed tools to help them accomplish both objectives simultaneously. Consider the case of Morgan Crucible, a large, 150-year-old manufacturer of specialty ceramics, carbon and other industrial materials, based in the U.K.

In late 2002, Morgan was in serious trouble: Debt was high, the share price low, cash scarce. Even the pension-fund liabilities were three times the company's market capitalization. The board brought in a new leader, Warren Knowlton, to engineer a turnaround, and over the next three years, Knowlton did just that. Today, the company is once more healthy. It has no debt, a secure pension fund, operating margins three times as great as they were before, and a share price nearly 10 times higher.

But it was Knowlton's first step that laid the groundwork for what followed. Just before Christmas 2002—before he had officially taken over—he circulated a list of 30 questions to the heads of Morgan's nine global business units. The "homework," as he calls it, was a comprehensive survey of the state of each business. The questions ranged far and wide.

The most important may have been, "How many business segments do you have, and what is the strategic position of each one measured by its market share relative to competitors?" But there were plenty more. "What is the ratio of fixed and variable costs?" "How would you describe the balance-sheet intensity of your business?"

Each heading contained numerous sub-questions, to the point where the business leaders could probably have written 30 lengthy essays in response. Knowlton wanted detailed answers, but he also wanted each executive to prepare a 15-minute presentation summarizing the situation.

The results, as they say, spoke volumes. One question, for instance, focused on the business's relative power in the supply chain, thus indicating whether the unit was supplying commodities or more highly differentiated products. "That enabled me to make a judgment about most of our businesses within weeks," says Knowlton, who promptly sold off four of the company's units. A series of questions about research and development suggested to Knowlton that Morgan's centralized R&D facility was too highly focused on basic research and too far removed from the practical needs of customers. Knowlton disbanded the centralized unit, put the scientists and engineers back into the businesses and gave the business heads responsibility for overseeing R&D.

Where did the idea of 30 questions come from? "They are the questions I ask myself about any business," says Knowlton, who pounded out the first draft of his lengthy survey on a single plane ride. To be sure, the survey was only one instrument in Knowlton's toolkit, as it would be for any general manager. Newly appointed leaders must follow up with a deeper diagnosis of the company's full performance potential, which will help them set targets for the next couple of years. But a quick initial capability assessment like Knowlton's questions can give them a big head start on the two challenges that face them the minute they walk in the door.

Steve Schaubert, a partner with Bain & Company in Boston, is a leader in the firm's Global Performance Improvement practice. William Hayes is a partner in Bain's Atlanta office. Bain does not disclose its clients, but articles by Bain partners draw on a mix of client and non-client examples.

In Pictures: Ten Questions New CEOs Should Ask Their Executives
1. Market Share
Are you gaining, holding or losing market share in each of the segments that constitute your business? Why? Against which competitors?
2. Customer Leverage
What percentage of your product is sold to customers who have significant leverage over you? Which customers are they, and why do they have leverage? Please provide a list of your top 25 customers and approximate sales volume to each. How much revenue comes from price-sensitive commodity products?
3. Fixed And Variable Costs
What is the ratio of fixed and variable costs for your business? If the business has several segments, is there a wide range by segments? Provide a profit and loss report for last year and your planned P&L for this year. Break down the fixed and variable costs in some detail.
4. Purchasing
How do you do your purchasing? Who does it for you? How would you assess the skills of those who are involved with the purchasing process? Do any of your purchasing needs complement those of another business unit? If so, how do you exploit that? What percentage of your total external purchases are bought from suppliers with significant leverage over your business?

5. Balance Sheet
Are you running an asset-intensive business? What's been happening with working capital over the last few years? What is likely to occur this year? Why?

6. Research And Development
How would you describe the role of R&D in your business? Who takes the lead in your business unit, and how does this person work with corporate R&D? How much R&D comes from within the business, and how much comes from the corporate office, or outside the company altogether? What is your total R&D budget?
7. Leadership Approach
What is your personal approach toward running your business? If you had to sum it up in three to five phrases or qualities, what are they? Has this approach worked? What tells you so? Are you able to modify your approach if you see that it does not appear to be working? Can you offer any examples? What are your five best strengths, and how did you come by them? What are five areas for improvement, and what are you doing about them?
8.  People
What are you doing to ensure that the best-qualified people are in a position to move forward in your organization? That is, what is your approach to succession planning? How are you ensuring that you re-recruit your keepers and remove and replace those who are either not good contributors or who are not able to adjust to changes in the business?

9. The New CEO
What are the three most critical qualities, skills or capabilities that a new CEO should have at this stage of the company's history? Why?

10. Business Turnover
Of your total business turnover, how much of it this year will likely come from markets or market segments where your company is (a) Clearly the leading competitor? (b) One of several equally strong competitors? (c) Clearly one of the weaker competitors? In each of the three situations, how does being in such a position affect your pricing tactics?